Enterprise 2.0: Freemium first, enterprise second (Part 1 of 3)

The market for Enterprise 2.0 apps has taken off in the time since I first alerted consumer software entrepreneurs to this huge new opportunity (“Enterprise 2.0: Calling Consumer Internet Entrepreneurs!”). Multiple venture-backed Enterprise 2.0 companies already boast billion-dollar-plus valuations, and there have been a number of quick and profitable exits (EchoSign, Jigsaw and TripIt, for example).

Enterprise 2.0 remains one of the best opportunities in the technology market today. The enterprise software incumbents are currently a full generation behind, just now entering the traditional SaaS market through acquisition (for example, Oracle’s $1.5 billion acquisition of RightNow and $1.9 billion acquisition of Taleo, and SAP’s $3.4 billion acquisition of SuccessFactors).

Meanwhile, more forward-looking software companies like Salesforce.com are realizing that the route to the enterprise now goes through the user, not the IT department. Salesforce.com has snapped up several Enterprise 2.0 companies, including Assistly, Rypple, Manymoon and Groupswim (now Chatter).

But Salesforce.com is the exception. It will be another five years before the mainstream enterprise software market wakes up to the fact that Enterprise 2.0 apps are the industry’s future. That’s plenty of time for new companies to establish market leadership and challenge the incumbents, who will either have to adapt or buy Enterprise 2.0 startups to remain competitive.

In my previous article, I described the go-to-market model of a typical Enterprise 2.0 startup in three phases: freemium, inside sales and enterprise sales.

This article is focused on phase one — freemium. In follow-up articles, I will dig into the transition to an inside sales force and then how to add a profitable direct sales force to the model. Almost all Enterprise 2.0 startups employ each of these sales strategies sequentially or in parallel at different points in their maturity.

Freemium product design

Enterprise 2.0 starts with the premise that “users” are “consumers” first and foremost, and that they make the software purchase decisions, not the IT department. So how do you attract enterprise users?

1. Make your app fun. Employ game mechanics, from vendors like Badgeville, to drive engagement. Design an app that you’re passionate about — perhaps because it addresses one of your own needs. Give it a personality. SurveyMonkey is a good example of app personality resulting in increased market share. The last thing users are looking for is a boring software experience.

2. Study your active users. The key metric of freemium product design is active users. Instrument your app with analytics tools from vendors like Google Analytics or Flurry. The data your users generate will drive product management and usability decisions, which in turn will drive conversion and revenue. Determine the most popular features, and then remove the least popular ones. As Twitter co-founder Jack Dorsey says, “Simplification is key.”

3. Pre-populate the data. No one likes an undecorated room, and no one likes an app with no data. Incorporate data from outside sources such as Google Apps (email and contacts), Salesforce.com (accounts and status), Facebook or LinkedIn (contacts and relationships). Can you expose anonymized or aggregated data from other users? Is crowd-sourced data an option?

4. Don’t forget the APIs. Users expect freemium Enterprise 2.0 apps to work with their existing systems. Publish your own APIs and let your users build integrations and product extensions, and then publish these back to your user community.

5. Prioritize the platforms. Your app also needs to be available through web browsers, iOS and Android, at a minimum. Depending on your specific application, making it available via desktop downloads, bookmarklets, browser plugins or MS Office plugins may increase your user base. HTML5 and cross-platform development tools such as Appcelerator and Sencha can help with this.

Freemium distribution

The key metric of distribution is downloads, so make your product available everywhere your user is likely to be. In my experience, mobile apps tend to accumulate two to five times more users than web-only offerings. Venture investor Fred Wilson covered this in his blog post, “Mobile First, Web Second.” The mobile market is much larger too. Smartphones and tablets outsold PCs by almost two times in the fourth quarter of last year.

1. Target the mobile user first. Enterprise 2.0 app developers should target the mobile user via the Apple App Store and Android Market (recently rebranded Google Play). The Amazon.com Appstore for Android is the next place to focus in terms of importance. If you have the resources, you should also consider developing for secondary app stores such as Windows Phone Marketplace or Blackberry AppWorld. Getting ranked and positively reviewed on these sites takes some effort and capital, but it’s worth it.

2. Focus next on the web marketplaces. Remember, your goal is downloads. Google Apps Marketplace is Google’s SMB offering. It promotes apps that are highly integrated with Google Apps (Gmail, Calendar, Sites, Docs) and has a healthy market share among small businesses. Google’s Chrome Store is geared more towards individual users, but it is also a productive distribution channel. Salesforce.com’s AppExchange, one of the original marketplaces for Enterprise 2.0 apps, is being repositioned to serve users, not just system admins, and will be another new channel.

Freemium conversion

The key metric here is conversion rate. If you have successfully executed your product design and distribution, you should have a sizable free user base, and in my experience, one to three percent of them will convert to your paid version. Increasing your conversion rate may be the difference between success and failure, so experiment with ways to improve it.

1. Erect a paywall. The most common way to convert free users into paying customers is to erect a paywall that unlocks additional features or capacity. The analytics you collect from your early free users will give you insight into which features are considered most valuable, and thus what you should consider charging for. A single monthly price per user is the most common method of charging.

2. Offer a preview or free trial of additional features. One common way to increase your conversion rate is to entice users to upgrade by offering a preview or free trial of additional features within your app.

3. Remove barriers to conversion. One company, Atlassian, has developed a clever way to increase in-app conversion called Causium. Instead of charging users, Atlassian asks them to donate a small amount to a charity called Room to Read. The fundraising is for a good cause, but the strategy is really designed to get users to input their credit card details, thus removing a crucial barrier when you attempt to convert them to a paid subscription later.

4. Feel the love. Evernote CEO Phil Libin believes in the “NPR model.” Evernote gives users a fully functioning app for free. Libin believes that by developing a deeply loyal and happy user base, some will love the product so much that they will voluntarily pay for the premium edition. Even if your users don’t love your product as much as Libin’s, offering a fully functioning free app and then selling premium add-ons, such as integrations with existing enterprise applications, is an effective conversion strategy.

“Freemium” is an evolving term and startups are constantly experimenting and redefining the model as it applies to Enterprise 2.0. Please let me know what’s working for you. And stay tuned for my next article, which will outline the key metrics and best practices for selling Enterprise 2.0 software using an inside sales force.

Scott Irwin (@scottirwin) is a general partner at Rembrandt Venture Partners, where he focuses on Enterprise 2.0 and SaaS investments.He is very bullish on small startups’ ability to disrupt the stodgy enterprise software market.